The SET Index is likely to move higher this month. For one thing, we believe the spread of the Omicron coronavirus variant, which may have peaked, will take a back seat to domestic economic conditions.
The government has been gradually expediting infrastructure projects in the pipeline, which should improve confidence. In the meantime, investors may increasingly bet on stocks with a strong earnings outlook before the curtain on earnings season comes down in early March.
Among the positive factors driving trade are earnings plays. Investors have placed big bets on stocks with a strong fourth-quarter earnings outlook. Pending the release of all results, aggregate fourth-quarter net profit for the SET is estimated to have surged to between 170 billion and 180 billion baht, beating our earlier estimate of 130 billion. If this occurs, the market's recovery will gain traction.
Government-backed electric vehicle and logistics-related projects, as well as economic and spending stimulus measures, such as Phase 4 of Khon La Khrueng and "We Travel Together", should bode well for the domestic economy.
On the coronavirus front, infection rates have been gradually decreasing, a factor we believe investors have already digested as they would rather keep eye on domestic economic improvement.
Negative factors include domestic politics. Keep an eye on political party switching, which is quite common ahead of an election, to see if it will have a negative impact on the government's stability.
Interest rates are also a concern. While the US Federal Reserve has made clear that it will start raising its benchmark rate in March, the size of the increase and the pace of subsequent hikes this year are major questions for markets worldwide.
FEBRUARY OUTLOOK
The SET Index hit a monthly high of 1,682 in mid-January before retreating to find support at 1,617 and finishing on a major uptrend line in the last week of the month. The major uptrend channel remained intact as the index later rebounded to 1,650, a point at which the index could break out in either direction. If the index holds firmly above 1,660, there is a potential upside towards 1,700. On the other hand, a break below 1,660 would point to a sideways to sideways-down channel between 1,616 and 1,585.
Investment strategy: We recommend investing in stocks with a strong earnings outlook and story, and those in attractive sectors. Stocks of companies that have managed pandemic challenges successfully also look attractive now that the situation is starting to gradually improve. Our picks in February include:
- BAM (Hold, target 20.50 baht): We are reassessing our earnings forecast and target price given that the company is now exploring a new joint-venture model to manage some assets. Our earlier Hold rating and target price were based on a 2022 price to book value (PBV) ratio of 1.6 times.
- BBL (Buy, target 146 baht): Our target price for the bank is pegged to 2022 PBV of 0 57 times or 1.5 standard deviations (SD) below its 10-year average. The stock currently trades at an undemanding 0.52 times PBV, or 1.75 SD, lagging the entire sector.
- RBF (Buy, target 29 baht): Our target price for the food processor is pegged to a 2022 price/earnings (PE) ratio of 40 times. The key catalysts are a rapid growth outlook in the first quarter, a period when the company is expected to begin recording a new stream of revenue from the hemp business, and upside potential to our forecast if CBD yields are good.
- SNNP (Buy, target 20 baht): Our target price for the food and beverage firm reflects an expected 2022 PE ratio of 38.0 times. Earnings are projected to enter a new growth phase on the back of strong organic and inorganic growth, while upcoming hemp and innovative food and beverage businesses will create an upside to our forecast.
- SPALI (Buy, target 28 baht): Our target price for the property developer is based on a 2022 PE of 8.6 times or its 5-year average. The stock's valuation looks cheap, trading at 7.1 times 2022 PE, implying 1 SD below its 5-year historical average.
- SYNEX (Buy, target 42 baht): Our target price for the IT distributor is pegged to a 2022 PE ratio of 36 times or 3 SD above its 5-year average. We see earnings riding an uptrend with gross profit margins set to widen for the long term on the back of the new gaming console segment and the IT solutions business. Additionally, a strategy to seek new partners will help expand the company's product portfolio, and thus bodes well for earnings growth.
- TOP (Buy, target 68 baht): Our target price for the energy company is pegged to a 2022 PBV of 1.12 times or 0.25 SD below its 5-year average. The stock's valuation looks attractive, trading at 0.87 times 2022 PBV or 1.0 SD below its 5-year average.
